Question 1

Which of the following statements about the mechanistic hypothesis is not correct:

Accepted Answer

A)  investors can be misled by the use of different accounting policy choices. 
B)  investors respond differently to changes in profit depending on what causes the changes. 
C)  investors ignore differences in accounting policies when analysing financial statements. 
D)  investors are only concerned about changes in reported figures in financial statements. 
A)  investors can be misled by the use of different accounting policy choices. 
B)  investors respond differently to changes in profit depending on what causes the changes. 
C)  investors ignore differences in accounting policies when analysing financial statements. 
D)  investors are only concerned about changes in reported figures in financial statements.

Question 2

Which of the following processes describe how positive theories are developed:

Accepted Answer

A)  Principles $\rightarrow$ Assumptions $\rightarrow$ Objectives $\rightarrow$ Definitions/Actions. 
B)  Objectives $\rightarrow$ Definitions/Actions $\rightarrow$ Assumptions $\rightarrow$ Principles. 
C)  Definitions/Actions $\rightarrow$ Principles $\rightarrow$ Assumptions $\rightarrow$ Objectives. 
D)  Objectives $\rightarrow$ Assumptions $\rightarrow$ Principles $\rightarrow$ Definitions/Actions. 
A)  Principles $\rightarrow$ Assumptions $\rightarrow$ Objectives $\rightarrow$ Definitions/Actions. 
B)  Objectives $\rightarrow$ Definitions/Actions $\rightarrow$ Assumptions $\rightarrow$ Principles. 
C)  Definitions/Actions $\rightarrow$ Principles $\rightarrow$ Assumptions $\rightarrow$ Objectives. 
D)  Objectives $\rightarrow$ Assumptions $\rightarrow$ Principles $\rightarrow$ Definitions/Actions.

Question 3

The most correct reason of why residual loss is incurred is:

Accepted Answer

A)  principals do not take any actions to control agents' behaviours. 
B)  agents do not always act in the best interest of principals. 
C)  it is too costly for principals to completely monitor agents' behaviours. 
D)  agents are rational wealth maximisers. 
A)  principals do not take any actions to control agents' behaviours. 
B)  agents do not always act in the best interest of principals. 
C)  it is too costly for principals to completely monitor agents' behaviours. 
D)  agents are rational wealth maximisers.

Question 4

The risk aversion problem in shareholder-manager agency relationships arises because:

Accepted Answer

A)  managers are more risk-averse than shareholders. 
B)  shareholders prefer less risk than do managers. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders are not able to diversify their risk. 
A)  managers are more risk-averse than shareholders. 
B)  shareholders prefer less risk than do managers. 
C)  managers have less capital invested in the entity than shareholders. 
D)  shareholders are not able to diversify their risk.

Question 5

Which of the following is a limitation of the use of inductive reasoning in the development of theory:

Accepted Answer

A)  it does not attempt to improve current practices. 
B)  it is based on the subjective selection of objectives by the theorist. 
C)  it is not based on observed actions. 
D)  it is only useful for developing prescriptive theories. 
A)  it does not attempt to improve current practices. 
B)  it is based on the subjective selection of objectives by the theorist. 
C)  it is not based on observed actions. 
D)  it is only useful for developing prescriptive theories.

Question 6

An example of bonding costs is:

Accepted Answer

A)  auditor's fees. 
B)  cost of implementing a management remuneration plan. 
C)  cost of preparing quarterly financial reports. 
D)  cost of setting up company's code of conducts. 
A)  auditor's fees. 
B)  cost of implementing a management remuneration plan. 
C)  cost of preparing quarterly financial reports. 
D)  cost of setting up company's code of conducts.

Question 7

The way that lenders charge a higher interest rate for loans assessed to be of higher risk is known as:

Accepted Answer

A)  risk aversion. 
B)  wealth maximisation. 
C)  claim dilution. 
D)  price protection. 
A)  risk aversion. 
B)  wealth maximisation. 
C)  claim dilution. 
D)  price protection.

Question 8

Normative theories:

Accepted Answer

A)  prescribe what should be the case based on a specific objective. 
B)  are based on what is happening in the world. 
C)  explain why people behave in certain ways. 
D)  predicts unobserved phenomena. 
A)  prescribe what should be the case based on a specific objective. 
B)  are based on what is happening in the world. 
C)  explain why people behave in certain ways. 
D)  predicts unobserved phenomena.

Question 9

Which of the following statements is not consistent with agency theory:

Accepted Answer

A)  Entities employ managers to conduct business on their behalf and to negotiate contracts with other parties. 
B)  Managers are more likely to favour the interests of debtholders than those of shareholders in managing debt contracts. 
C)  Managers will not always act in the best interest of shareholders. 
D)  There are costs incurred in order to control agent's behaviour. 
A)  Entities employ managers to conduct business on their behalf and to negotiate contracts with other parties. 
B)  Managers are more likely to favour the interests of debtholders than those of shareholders in managing debt contracts. 
C)  Managers will not always act in the best interest of shareholders. 
D)  There are costs incurred in order to control agent's behaviour.

Question 10

Which form of market efficiency is the most relevant to financial reporting:

Accepted Answer

A)  The weak form of market efficiency. 
B)  The semi-strong form of market efficiency. 
C)  The strong form of market efficiency. 
D)  None of the options is correct. 
A)  The weak form of market efficiency. 
B)  The semi-strong form of market efficiency. 
C)  The strong form of market efficiency. 
D)  None of the options is correct.

Exam 2: Application of Accounting Theory

Which of the following statements about the mechanistic hypothesis is not correct:

Which of the following processes describe how positive theories are developed:

The most correct reason of why residual loss is incurred is:

The risk aversion problem in shareholder-manager agency relationships arises because:

Which of the following is a limitation of the use of inductive reasoning in the development of theory:

An example of bonding costs is:

The way that lenders charge a higher interest rate for loans assessed to be of higher risk is known as:

Normative theories:

Which of the following statements is not consistent with agency theory:

Which form of market efficiency is the most relevant to financial reporting:

Accounting Regulation and the Conceptual Framework

Fair Value Measurement

Inventories

Property, Plant and Equipment

Intangible Assets

Impairment of Assets

Provisions, Contingent Liabilities and Contingent Assets

Employee Benefits

Leases

Financial Instruments

Income Taxes

Share Capital and Reserves

Share-Based Payment

Revenue

Presentation of Financial Statements

Statement of Cash Flows

Accounting Policies and Other Disclosures

Earnings Per Share

Operating Segments

Related Party Disclosures

Sustainability and Corporate Social Responsibility Reporting

Foreign Currency Transactions and Forward Exchange Contracts

Translation of Foreign Currency Financial Statements

Business Combinations

Consolidation: Controlled Entities

Consolidation: Wholly Owned Entities

Consolidation: Intragroup Transactions

Consolidation: Non-Controlling Interest

Consolidation: Other Issues

Associates and Joint Ventures

Joint Arrangements

Insolvency and Liquidation

Accounting for Mineral Resources

Agriculture

Filters